PRODUCT COSTING AND COST ACCUMULATION IN A BATCH PRODUCTION ENVIRONMENT

Topics: Management accounting, Cost accounting, Costs Pages: 20 (2112 words) Published: October 15, 2013
CHAPTER 3 BRIEF SUMMARY

PRODUCT COSTING AND COST ACCUMULATION IN A
BATCH PRODUCTION ENVIRONMENT

Learning Objectives

1.Discuss the role of product and service costing in manufactur­ing and nonmanufactur­ing firms.

2.Diagram and explain the flow of costs through the manufacturing accounts used in product costing.

3.Distinguish between job-order costing and process costing.

4.Compute a predetermined overhead rate, and explain its use in job-order costing for job-shop and batch-production environments.

5.Prepare journal entries to record the costs of direct material, direct labor, and manufacturing overhead in a job-order costing system.

6.Prepare a schedule of cost of goods manufactured, a schedule of cost of goods sold, and an income statement for a manufac­turer.

7.Describe the two-stage allocation process used to compute departmental overhead rates.

8.Describe the process of project costing used in service industry firms and nonprofit organizations.

Chapter Overview

I.Product and Service Costing
A.Use in financial accounting
B.Use in managerial accounting
C.Use in cost management
D.Use in reporting

II.Flow of Costs in Manufacturing Firms
A.Work-in-process inventory
B.Finished-goods inventory
C.Cost of goods sold

III.Types of Product-Costing Systems
A.Job-order costing systems
B.Process-costing systems

IV.Job-Order Cost Accumulation
A.Job-cost record
B.Direct materials
C.Direct labor
D.Manufacturing overhead

V.Overhead Application
A.Terminology and application steps
B.Incurrence of actual overhead
C.Adjusting the over- or underapplied overhead at the end of the accounting period

VI.Extended Illustration of Job-Order Costing: Calculations and Journal Entries

VII.Financial Schedules
A.Schedule of cost of goods manufactured
B.Schedule of cost of goods sold

VIII.Further Aspects of Overhead Application
A.Actual and normal costing
B.Choosing the appropriate cost driver
C.Departmental overhead rates
D.Two-stage cost allocation
IX.Project Costing in Nonmanufacturing Organizations
A.Description of the overall process
B.Changing technology

Key Lecture Concepts

1.PRODUCT AND SERVICE COSTING

A product-costing costing system accumulates the total cost of making products and facilitates the calculation of a per-unit cost. Applications exist in:

Financial accounting: Valuation of ending inventory on the balance sheet and determination of cost of goods sold for the income statement

Managerial accounting: Planning, cost control, and decision making

Cost management: Cost control and cost reduction

General reporting: Audience includes state regulatory agencies, insurance companies, hospitals, and the government.

Managers of nonmanufac­tur­ing organizations need product-cost information as well. For example, product costs are used by account­ing firms, which set a contract price for audit jobs, and by hospitals, which are reim­bursed on a per-case basis under Medicare.

2.FLOW OF COSTS IN MANUFACTURING FIRMS

As production takes place, manufacturing costs are tracked in the Work-in-Process Inventory account. Every product is made up of three cost components: direct materials, direct labor, and manufacturing overhead. After products are completed, the corresponding cost leaves the Work-in-Process account and is debited to the Finished-Goods account. (A merchandising firm buys its goods already completed and directly debits the items' cost to Merchandise Inventory.)

When units are sold, the Finished-Goods Inventory account is credited and Cost of Goods Sold is debited.

3.TYPES OF PRODUCT-COSTING SYSTEMS

A product-costing system must be adapted to match the environ­ment in which it operates.

A job-order costing system is used in an industry where products are made individually, or in relatively small...
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